The Bank of Japan has the capacity to manage inflationary pressures stemming from the Middle East conflict, according to Rahul Anand, the International Monetary Fund's mission chief for Japan. Anand stated that any broader price effects would likely be moderate.
This assessment comes as rising oil prices due to the conflict exacerbate inflation concerns, fueling market speculation about a potential near-term interest rate hike by the BOJ. While higher energy costs will impact headline inflation, Anand indicated that the BOJ can maintain its gradual rate hike strategy, as these price pressures are unlikely to destabilize inflation expectations.
"Higher prices are less likely to feed into core inflation or wages, so we think that the second-round impact will be more moderate compared to other countries," Anand explained. He added, "Even if there is a temporary spike in headline inflation, the BOJ can see through that and resume the withdrawal of accommodation at the same pace as if the baseline pans out. Unlike many other central banks, the BOJ has room to see through this shock."
However, Anand cautioned that the BOJ must remain data-dependent and adaptable, citing risks to economic growth and inflation outlooks due to the war's uncertainty. The IMF projects Japan's inflation to reach the BOJ's 2% target by late 2027, anticipating three more policy rate hikes, bringing it to 1.5% from the current 0.75%, by mid-to-late next year.
A weak yen also presents a concern for policymakers by increasing import costs and contributing to inflation. Anand noted that the IMF sees no significant inflationary pass-through from a weak yen in 2025 and suggests the exchange rate should be determined by market forces.